An investigation into the use of REITs to finance affordable housing in Mainland China

Abstract

Mainland China's system of affordable housing provides housing for low and medium income groups. Housing for sale and housing for rent give residents two choices and also give two choices for municipal governments to provide affordable housing. Municipal governments play a mono role in building and financing affordable housing, so they tend to build housing for sale rather than for rent to collect back investment in order to finance more housing units. However, rental housing is more affordable to residents in China. Municipal governments lack a way to liquefy these rental properties and attract private investment. On one hand, municipal governments hold a lot of rental properties worth billions of money; On the other hand, they still lack funding sources to finance new affordable rental housing. No liquidity has made municipal governments stuck with holding properties, and reduced their ability to build more public rental housing for low and medium groups. Real Estate Investment Trust (REIT) is a financial vehicle that securitizes properties and allows private sectors to invest and trade securities of real estate. Mainland China plans to use this vehicle to securitize rental-housing units owned by municipal governments and help finance affordable housing through attracting private sector's investment. It has built up its structure of bond-like REIT, which is different from traditional equity REIT in the U.S. What should policy makers keep in mind in order to successfully implement the plan? This thesis answered this question by researching experiences from other countries and areas. It reviewed a mature market, REITs in the US, on its history and experience of REITs participating into affordable housing. It also studied a failure case from Hong Kong, which privatized its public housing properties by the Link REIT and generated social losses. This thesis also researched the bond-like REITs from the experience of Real Estate Asset Trust (REAT) in Taiwan. Based on these researches, the thesis found Mainland China's opportunities. It suggested that debt financing instead of equity financing by public listed REITs is important to preserve the safety of affordable statue of housing units. It also found that affordable housing is attractive to REITs during recession period with it steady and low risk of income. There are also other significant implications suggested that should be kept in mind for policy makers in Mainland which are included in the last chapter of the thesis.